SEC Should Regulate Stablecoin Issuers

Earlier this week, Senators Lummis and Gillibrand introduced new legislation to regulate the crypto space, and most of the headlines focused on the win for the Commodity Futures Trading Commission (CFTC) over the Securities and Exchange Commission (SEC). If the bill is approved in its current form, it would allow the CFTC to oversee more crypto assets, as many of them would be considered commodities.

But on Friday (June 10), Sheila Bair, a former chair of the U.S. Federal Deposit Insurance Corporation (FDIC) penned an op-ed piece in the Financial Times advocating for a stronger role of the SEC in the supervision of stablecoins.

Bair argues that if regulators take the initiative, they could spur Congress to act, and in any event, none of the possible steps that a regulator can take would preclude legislation.

Bair suggests different lines of action, but the first and most straightforward is for the SEC to use a regulatory model tailor-made for stablecoin issuers, the government money market funds (MMF). Both stablecoin and government MMFs promise investors liquidity and stable value and they both rely for stability on the safety of the reserves backing them, Bair argues.

Government MMFs have proved to be safe in times of stress because they must invest their reserves in cash and highly liquid federally back securities. Subjecting stablecoin issuers to these rules would make this market safer for investors, Bair explained. This is similar to some of the proposals suggesting stablecoin issuers should have reserves in cash or liquid assets for 100% of their value. For instance, the proposed crypto bill also touches on stablecoin saying that payment stablecoins must be backed by not less than 100% of the face amount of the liabilities of the institutions on payment stablecoins issued by the institution.

However, there is a major obstacle to implementing this plan, as Bair recognizes. For the SEC to use this model, it would have to determine that stablecoins are securities, what is uncharted territory for the time being. The legal test to apply for stablecoins would be same as to other crypto assets, the Howey test, which essentially assesses whether an investor would expect a profit when they buy stablecoins and most stablecoins do not yield returns. The Lummis-Gillibrand crypto bill maintains the Howey test to determine which cryptocurrencies are securities and fall under the SECs remit. But if the SEC doesnt want to enter in this discussion, which may be reasonable considering the legal problems that a similar discussion on whether certain cryptocurrencies are security or commodity has brought to the agency, Bair suggests that at a minimum, the SEC could pursue a voluntary regime of oversight for responsible stablecoins issuers. It is worth noting that Bair serves on the board of Paxos, a blockchain company and regulated stablecoin issuer.

Banking regulation is an alternative to the SEC, Bair argues. This would give stablecoins issuers access to safety net programs, including deposit insurance and the ability to borrow from Federal Reserve Banks. However, banking regulation is poorly equipped to deal with investor protection, transparency, manipulation and fraud issues that plague the crypto world, Bair said. Unlike the Lummis-Gillibrand proposed crypto bill, Bair doesnt count much on the CFTC to regulate stablecoins. She mentioned that the CFTC could use its broad anti-fraud and anti-manipulation enforcement authority as a partial solution, but she doesnt suggest this agency should be the right authority to oversee stablecoins.

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